Veteran biotech investors who are familiar with what happened to ChemGenex in 2011 will take some heart from the crash in the Pharmaxis share price, which was accompanied by the trading of about 6 per cent of the issued capital.

Cephalon is well known to Australian biotech investors. It entered a strategic alliance with Mesoblast in late 2010 and took a 20 per cent stake in the company.

The Australian biotech space is a risky one to play in, as shown by the volatility in Pharmaxis’s share price over the past two years. But it is also an area characterised by over- and under-shooting of stock prices.

Related Quotes

Company Profile

One long-standing investor in the field told Chanticleer it was not unusual for a stock that has been smashed by an unfavourable FDA ruling to rise 20 to 30 per cent in the days following the collapse.

Pharmaxis has approval for its main drug, Bronchitol, in Australia and for use by adults in Europe. The European approval was gained after an initial knockback. Pharmaxis negotiated with authorities and gained approval in Europe after greater explanation of its clinical ­trials data.

The primary target market for Bronchitol is people suffering cystic fibrosis. There are about 80,000 ­people in the world suffering from the disease.

Bronchitol sales in Europe are running at about $2 million a year. The major competitor drug to Bronchitol is sold by Roche and called Pulmozyme. It has annual sales of about $US500 million.

The FDA advisory panel rejection of the Pharmaxis request for approval was a heavy blow for the company. But in a world of predator and prey, Pharmaxis might find itself coming up on the radar of a big global pharmaceutical company.

One possible predator apart from Roche is US pharmaceutical company Vertex Pharmaceuticals, which sells a cystic fibrosis treatment, Kalydeco.

The immediate impact of the FDA rejection will be to delay the approval of Bronchitol in the US for about a year.

Pharmaxis avoided diluting existing shareholders by securing a financing agreement worth as much as $US40 million with a specialist US fund called NovaQuest Pharma Opportunities Fund III. The funds will ensure it has sufficient cash to get Bronchitol through to possible FDA approval for use by adults in the United States.

The financing deal involves Pharmaxis sharing the European and US revenue from Bronchitol with NovaQuest Pharma. The amount of shared revenue will depend on how much finance is drawn down. If the company draws down $US20 million the revenue sharing will be up to 5 per cent and if $US40 million is drawn down the revenue sharing will be as much as 15 per cent.

The key thing to note is that the financing agreement does not in any way restrict the ability of the company to contemplate offers or to be taken over.

The Pharmaxis experience is an interesting case study of the Australian biotech sector. It shows that the route to a smart nation reliant on intellectual capital rather than commodity exports will not be a smooth one.

However, it also shows that a small company based in Sydney can develop a globally significant drug with equity market funding of about $300 million. Also, it has had no trouble obtaining further financing to secure its future.

Investors will probably give the management, led by chief executive
Alan Robertson
, a hard time as the FDA advisory committee rejection raises questions about possible flaws in the design of its clinical trials.

Resource sector investors ­watching the bull market go by without much action in their shares should keep a close watch on the
Fortescue Metals Group
sale of a minority interest in its rail and port assets for about $US3 billion.

The queue of buyers for the Fortescue assets includes the same range of investors that have been buying infrastructure elsewhere, such as pension funds and sovereign wealth funds.

It is common knowledge that there are more infrastructure buyers in the world than there are oppor­tunities to invest. The pension and sovereign funds demand internal rates of return of 10 to 12 per cent, whereas big companies demand returns in the high teens. In other words, there is a huge opportunity to unlock value on corporate balance sheets.

That leads to the obvious point that
Rio Tinto
and
BHP Billiton
should be exploring the same approach as Fortescue.

Shareholders in BHP and Rio did not enjoy the upside of the resources boom. It was as if they were invested in sovereign states that were there to build huge projects even though this involved pushing up the cost of projects by bidding against each other at the development peak.

A change in management psychology will be in the interests of all shareholders and open the way for achieving higher returns.